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A Matter Of Who And What To Value

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Last week I stumbled into a post from Don Peppers about the Real Implications of the 80/20 Rule. Peppers uses a football-stadium of 50.000 people (Customers and prospects to be exact) as an example to explain that the 80/20 rule not only implies that 80 % of your business is done by just 10.000 people in the stadium, but that the same rule also implies that 80% of the business of those 10.000 is done by just 2.000, and 80 % of the business of these 2.000 is done by just 400 etc etc.. In the end Don concludes that it is just 80 people who do as much as 2/3 of the business the other 49.920 are doing.

Peppers continues stating

“the truth is that some of these customers will inevitably be much more valuable to you than others, and your marketing investment would be much more productive if you knew who they were.”

I’ve been rethinking this “truth” for sometime now. Not that I came to a decisive conclusion btw (if there even is such possible), but I’d like to take you on this mixed journey of hope, belief, evidence and thought that I’m going through right now in relation to this topic. Please contribute yours in the comments!

First, it is of course very true that some Customers are more valuable to a company than others, but I’m beginning to doubt we are even able to understand who those Customers are. Analytic teams work with less than half the data the company has or generates, let alone it is the right data. Like Graham Hill states in his comment to my previous post [text in brackets added by me for reasons of clarification]: “Without access to enriched data of this [e.g. contextual data, use-data, influence-data] kind, too much analytics is wasted on pushing propensity models [based on past transactional data] to achieve the next 0.01% sales uplift”.

And that’s not even included so-called “engagement” data as in Customer feedback, willingness to participate in surveys, recommend your service to a friend etc etc. The former data being part of the concept of Total Customer Engagement Value which would be the next frontier of Customer Value Management. I doubt it will be anytime in the next decade, since very few (if any) companies have started to incorporate e.g. social interactions into their CRM systems. And if we do not have that data, how can we even begin to find out who is more valuable, let alone who might be in the future.

Secondly, I’ve discovered that most Customers/Prospects you target based on Lifetime Value based propensity and other predictive models, and who actually buy, would have bought without you targeting them in the first place. From my own experience the real return on your effort here can be as little as 20 % of what you thought your conversion rates where. And yes, that’s 20 % of less than 5% (if you’re lucky!) conversion rates to begin with. So, what does that mean for your Cost per Order? They will explode with a factor 5.

If there are more interesting conversion-rates, let’s say in the 20-something percentages, it will not likely be out of more than a few (relatively speaking) “prospects”. If you want to be successful growing your business based on these conversions in a B2C environment you are likely making such high costs that any one will out-price you before you can actually reward your first Customer in your Customer Loyalty Program {pun intended;). Unless you are providing a service that Customers value no matter what the costs to them and your boss doesn’t care about the cost you make to find and lure them in. If so, I can congratulate you ;)

Moreover, as I stated in my Hobby Horse post, companies need to focus their Customer experience efforts. We cannot be great in anything if we do not focus. Focus on the right experience for the right Customers. That is, the ones willing to pay (much, preferably) more than the costs we need to accrue for serving them. And I’m starting to believe that that is exactly where the Customer Lifetime Value approach took a wrong turn: taking costs into the equation. Costs are our problem, not the Customer’s. And if costs should not be the driver for our price, why should it be a driver for determining who our most valuable Customer is?

Last, but not least: If we want marketing to transform from goods-logic to service-logic, if we want to focus on what Customers value over what companies value, why be so bothered with Customer (Lifetime) Value? Should we not focus our efforts, our precious time and money on how we can better serve Customers? If we are ever to take the Customer’s experience serious should we not transfer budget from sales-campaigns and advertising to improving the very experience the Customer’s value? Instead of collecting and analyzing data to try and find the Customers we think we need, should we not collect and analyze data to understand what Customers want?

Am I wrong to think that your marketing investment would be more productive if you knew what your Customers value (when), not who you value?

28 thoughts on “A Matter Of Who And What To Value”

“If we are ever to take the Customer’s experience serious should we not transfer budget from sales-campaigns and advertising to improving the very experience the Customer’s value?” –Wim, and this exactly is what networking marketing is for.

Greetings! This is my first comment here so I just wanted to give
a quick shout out and say I genuinely enjoy reading your posts.
Can you recommend any other blogs/websites/forums that deal with the same topics?

This resonated in me. Some businesses failed to see that more than making profits, the organization’s duty is to provide quality customer value. On today’s business, you do not focus on your competition rather you innovate to keep customers’ loyalty. Therefore, you should invest on engaging and communicating with your customers to find solutions for their need and opportunities on their current situation. On-going concern will never be a problem only if businesses had established long intimate ties with their delighted customers and organization partners as well.

Wow, all this hubbub about a simple clarification of the power law distribution of values. Just to be clear, the baseball stadium analogy was not directed at baseball fans, but at the 80-20 Rule, in general. It is a shortcut to describing a Power Law distribution (see http://en.wikipedia.org/wiki/Power_law), which is “scale invariant.” And power law distributions are in fact, the way customer values are typically distributed for a business (although not always 80-20, which is a relatively high skew). Power laws also define the way incomes are distributed within a population, housing values are distributed within a geography, etc.

But as most of the commenters on your very provocative post, Wim, have pointed out, there is more to a business’s success with customers than simply knowing which ones are the most valuable to you. Knowing your customers’ value to your business is, unfortunately, where most companies’ curiosity ends. But customers are different in two primary ways: What their value to a business is, and what they NEED from the business. Moreover, if you want to entice your customers into different behaviors in order to increase (or maintain) their value, which is of course the purpose of all marketing activity — to change your customers’ future behaviors — then you have to be able to motivate them by knowing what they need (e.g., the customer-experience connection).

My post on the real implications of the 80-20 rule was solely about the value-differentiation of customers. But I’ve also posted many times about the importance of needs-based differentiation of customers, as well as customer experience management. See http://linkd.in/1dKKpO8 and http://linkd.in/19ezXZg and also http://linkd.in/15AdAJH, for a few examples.

Business success cannot be gained by applying a simple algorithm. It requires judgment, creativity, wisdom, and initiative.

Q2: ON INSTRUMENTAL SERVICES, SERVICE PLATFORMS AND MULTI-SIDED MARKETS

Your second question asks… whether in designing services for segments you should identify customers through their behaviours and manage them accordingly or build a platform and matching capabilities so that customers self-select the right services themselves. In other words, should we build services around specific segments, or should we build service platforms where customers can self-select services themselves. Again, hidden in plain site is the same deeper question about how we optimise the mutual value for both the Company and its customers.

If I had answered this question ten years ago I would have said we should select customers we know we can serve well and still turn a profit, design tailor-made to deliver their needs and our needs to make a profit, and then communicate what we had developed to customers. This is the Type 1 Marketing developed by pioneers like Ted Levitt almost 50 years ago. It probably reached its zenith with Lanning & Phillips methodology ‘Building Market-Focussed Organisations’ which Michael Lanning turned into a best-selling book ‘Delivering Profitable Value’ a few years later. It is still one of the best books on creating mutual value for companies and customers.

Today, most companies have abandoned Levitt’s Type 1 marketing in favour of a more instrumental Type 2 Marketing. Rather than the surface opportunities, design profitable solutions, communicate them to customers model in Type 1 Marketing, Type 2 Marketing optimises market solutions and identifies target segments to market them to. The initial emphasis on surfacing opportunities and designing innovative solutions has been replaced by an emphasis on tweaking existing products. Bi, dumb data has increasingly replaced smart customer insights. It isn’t the big data that is the core problem but the instrumental, short-sightedness it induces in management. Why go to the bother of innovating risky breakthrough products when we can tweak our current ones and find target audiences for them using predictive targeting models with practically no risk?

However, all is not lost. Tomorrow’s answer to your question will look very different. The growth in the proportion of businesses that are service-driven, the arrival of software platforms and the increasing digitisation of everything is already changing how we do business. As Phil Simon shows in his excellent book ‘The Age of the Platform’, it has allowed platform-based businesses like Amazon, Apple, Facebook and Google to go from nowhere to become multi-billion dollar businesses in just a few years. Not only are they in the news, today, they are buying newspapers too!

But there is more to this than just providing services over a software platform. The four companies mentioned all provide services over a multi-sided platform. They provide a software platform where thousands of sellers can transact with millions of buyers, who normally wouldn’t meet. Rather than providing highly segmented services as would have happened 10 years ago, they provide a platform that enables others to provide a huge range of on-demand, software-enabled services to the customer base that uses it. Closed proprietary services have become open business processes-as-a-service. This radically changes how services are provided. Take Apple as an example. Traditional telcos operate single-sided businesses. They organise bundles of handsets, minutes, SMS and Mb that they sell directly to customers. They also provide walled-gardens of mediocre services that lock customers in to using the garden of branded providers. The emphasis is solely on the telco and its profits, and not at all on customers and their jobs-to-be-done. Customers are not impressed and have not signed up to walled gardens in any numbers. There is no wonder that the arrival of the Apple iPhone with its multi-sided market App Store platform changed all that. Rather than focus on handset-based bundles and walled gardens, Apple offered the iPhone with its bundled App Store that allowed almost anyone to create an ‘app’ designed to do one customer job very well. Hundreds of thousands of designers did exactly that; there are currently over 900,000 apps available on the App Store. For example, the Facebook app helps you keep in contact with friends. Shazam help you identify what music is playing and buy it. Yelp helps you identify which restaurant you should go to for dinner. Etc, etc, etc. The arrival of the Apple iPhone and the App Store catalysed a complete change in the mobile telecoms service industry. A change that increasingly leaves mobile telcos with their telco-oriented business models as mere providers of loss-leading data pipes.

Companies have gone through a number of evolutionary stages, from Type 1 Marketing with its emphasis on innovating profitable new services, through Type 2 Marketing with its emphasis on tweaking existing services for incremental profit, to exciting new platform-based services. The first two were mostly in-house affairs. Platforms are different. They are ecosystems of sellers and vendors. The company’s job isn’t to organise the service but to organise the platform and leave service provision to others. As the market capitalisations of Amazon, Apple, Facebook and Google show, there is an enormous amount of money in being a world-class service platform provider. And as the mass-migration of customers to platforms has shown, they are often significantly better at providing the services that help customers get their jobs done than yesterday’s proprietary service providers.

Couldn’t agree more. Companies and customers co-evolve together in the ‘dance of the market’. Adapting to the dance requires an understanding of dynamic capabilities (see articles by Helfat, Winter and Teece) and the ability to tweak them in response to changes in the tempo and beat of the dance. Let the music begin!

Your ‘A Clear Eye for Branding’ is a wonderful book. It backs everything into a slim volume full of steak, without any of the padding sizzle to be found in most business books. It was very influential in my earlier brand thinking. It is still as relevant today as it was when you wrote it.

I agree with you that Companies and customers should not be seen as opposing forces in a zero-sum game. Instead, they should be seen as collaborating partners in a plus-sum game. That doesn’t mean that either can get all of what they want, at least not usually, but it does mean that they should try to get as much as makes economic sense without short-changing the other.

this post and the subsequent discussion (in combination with the many years researching studying, and working with these models) led to an epiphany — thanks for hosting this and summarizing so many important points.

the problem is (always has been) that we see customers as…

nah, won’t make it that easy :-)

I need to do some more research,but will come up with the rest of the statement soon.

as an incentive to wait, the problem is that no matter what we are always trying to reconcile two forces, instead of understanding which is the stronger force and supporting that one. customers and companies are not opposing forces, we (businesses) see them that way so we can contend / pretend some control.

we have no control.

there is a model behind this, i got a couple of charts i drew while reading through this, but needs more work (i did start to talk about it in my CXO Talk last week).

Imagine there was no opponent to fight, then we could focus on collaboration – no?

Your first question asks… assuming resources are scarce, should companies give up their capability to analytically manage customers for value during each interaction with the company, in favour of two related capabilities 1. To understand customers needs expressed during (increasingly digital) interactions with the company and 2.to provide customers with the resources they need to get the most from each interaction. In other words, should we manage customers for their value to the company, or manage the company for its value to customers. Hidden in plain site is a deeper question about how we optimise the mutual value for both the Company and its customers.

I am sure there is a 40,000 word PhD in the answer to your two questions, but I will try and keep my answer to them to a few hundred words.

Resources are always scarce in companies. In 25 years of consulting, interim and service operations management I have never come across a company where resources were not scarce. Sometimes the scarce resources revolve around money, but more often than not they are related to the lack of knowledge about the market, poor working relationships with customers and unmotivated staff. Peter Drucker said that the only activities that create value in businesses are marketing (to sell the stuff that companies have) and innovation (to create the stuff they will sell tomorrow); all other activities are costs. The resources of knowledge, relationships and staff make marketing and innovation more effective. Certainly more effective than just throwing more money at them.

I don’t think I have ever come across a company with a thorough understanding of the value of its customers: one that encompassed costs, revenue, risks and all the levers that influence them. Some have proxy data for revenue, a tiny few have revenue data and proxy data for costs, but practically none have all three. And the efficiency, effectiveness and total factor productivity levers that companies can pull to improve them are hardly understood at all. I am sure there are exceptions out there, but I have never worked with any of them. They probably do not need my help.

Your question contains a philosophical false dichotomy. Even if financial and other resources are scarce, it should still be possible to both manage customers for their value to the company and to manage the company for its value to customers. They are not either/or propositions but rather, lead to questions about how much of each results in an optimum. And they both depend upon a series of shared capabilities. For instance, both require the capability of being able to ‘Collect and Use Smart Data’, whether to create real-time models to predict the propensity of a customer to buy a particular product, to provide decision tools to enable front-line staff and customers to make better decisions, or even to provide customers with transaction data in a machine-readable format that they can analyse themselves (as mandated by the recent UK Govt MiData legislation).

The heart of the matter is achieving a workable trade-off between the value of the customer to the company and value of the company to the customer. In the past asymmetric information and the bargaining power it brings allowed companies to gather more value from customers than was available to them in return. Customers were not happy, but a lack of viable competition meant they had no alternative but to grin and bear it. The internet and more recently, the mobile internet have started to change that. Today, customers may have as much if not more information about costs, prices and value than companies do. And they are increasingly free to compare one company’s proposition with those of its competitors on open comparison sites. To remains competitive, companies have to reduce their costs, increase their operating efficiency, or increase their customer-orientation. Probably, a bit of all three. Most companies have spent the last 20 years reducing costs and improving efficiency but there are no more quick wins to be had. All the improvements left are complex, difficult and expensive. And all the best improvements are in increasing customer-orientation.

Achieving this trade-off between the value of the customer to the company and value of the company to the customer revolves around what McKinsey’s David Court calls ‘the Customer Decision Journey’. This is the sequence of triggers, interactions and outcomes that influence key decisions by the customer, including the all-important one to buy a product. A structured approach for building an optimum Journey starts with understanding customer jobs-to-be-done and the touchpoints in the Journey, tools and technologies that customers hire to get them done. It then looks at the capabilities that customers need to do their jobs competently at each touchpoint. The pragmatic combination of customer jobs-to-be-done and the capabilities they require to do them covers the benefit and cost sides of value to the customer. The same exercise should be done for the company’s jobs-to-be-done and company capabilities to understand value to the company too. Understanding them both allows the trade-off to be negotiated.

Value to the customer and value to the company are like the two strands of DNA that twine around each other in the DNA Double Helix, only in this case they twine around the Journey within the supporting service system that organises how it all functions in a joined-up way over time. The trade-off between the value of the customer to the company and value of the company to the customer can only be achieved by incorporating the two different views of jobs, capabilities and touchpoints into the redesign of the Journey and the service system. This is largely the responsibility of the Company, including the development of new decision tools and technologies, and the training of customers to use them. But it is worth it; it is the only way to achieve a workable trade-off and thus, to optimise the co-creation of mutual value for both the Company and its customers.

Using the new approach to Journey redesign you can have your cake and eat it. I will use it to answer your other two questions in subsequent comments. Pass me another piece of Victoria Sponge.

Graham, your wonderful analysis confirms for business what the great screenwriter William Goldman wrote in his book of tips about successful script writing called “Adventures in the Screen Trade.” Here was a guy who, at the time of the book’s publication, had written the screenplays for such critically acclaimed movies as All the President’s Men and Butch Cassidy and the Sundance Kid. He certainly understood the “formula” for Hollywood success.

And what three-word insight from that book is he most well-known for? “Nobody knows anything.” :)

Companies should use the cost data they have to improve their decision making. Just as they should with all the other data they have. Even if the costs data is incomplete, or even not entirely accurate, decisions made using it will still be significantly better than those made without it. A growing problem with management today is that too much of it is driven not by evidence, but by management fads underpinned by wishful thinking. The whole circus around NPS is a good example. Despite the well documented methodologically flaws that render the NPS statistic next to useless, management is attracted by the hype of managing with a single statistic and the plethora of consultants who have sprung up to administer it like a dose of managerial snake oil. It is a lot easier than understanding the value network of your business ecosystem, identifying the pivotal leading performance measures, and putting in place the balanced scorecard of measures, indices and indicators required for evidence-based management. It is also a whole lot less effective.

The same thinking applies to the cost data under discussion. I don’t see this as theory at all. Most businesses have some idea of the costs that they incur, both fixed costs and variable costs. That is what management accounting systems are for. The costs may not be as accurate as most companies would like nor as neatly organised by customer segment as marketing managers would like, but they are still useful. Failing that, there are plenty of proxies for cost out there: from volume of stock in inventory, to numbers of staff, to process takt timing measures. It is management’s job to understand the cost data they have and to augment it where it is lacking. That doesn’t require ABC analysis. Just common business sense. Management should use the data they have to better manage their customers, including deciding the best options for managing customers. Anything less is simply abrogating their responsibilities as managers.

As the old saying goes, “In God we trust, all others bring data!”..

Graham Hill
@grahamhill

PS. I notice you didn’t tackle the moral issue around forcing other customers, shareholders and other stakeholders to carry the costs of unprofitable customers. Whether you take a deontological approach like Kant or a more consequentialist utilitarian one like Bentham, it is still morally and ethically wrong to impose the costs of unprofitable costs on others.

Most intelligent businessmen would agree that high profits or perhaps more usefully, a high return on total assets employed, is the result of being successful in business. The implication, as UK Economist John Kay so eloquently writes in his book ‘Obliquity’, is that businesses should focus primarily on what makes them successful in business and not on the results. But that doesn’t mean that we should ignore the components that make up the results, far from it. Costs are one of those components.

I am not sure I understand your logic when you say that “to what extent are costs (variable or fixed) relevant?“. A simple case illustrates why understanding and managing both fixed and variable costs are not only relevant, but critical to business success. Let’s assume we are a hypothetical company Champion Barbeques. We have two customers Mr A and Mrs B. Mr A is long-time customer who buys our flagship product – a polished steel, multi-burner, gas barbeque – from us each year at a price of GBP 100. We have fixed costs of GBP 50 for each barbeque and as Mr A always buys the same barbeque, low variable sales costs of GBP 20. That yields a profit of GBP 30 for each barbeque sold. Mr A is happy and doesn’t ask us for any support with the barbeque, in fact he probably could teach us a few things about cooking steaks to perfection with it! Maybe we should invite him round for a steak and a beer. We are happy too and so is our accountant.

Mrs B is a different kettle of fish. She is a new customer who has only bought our flagship barbeque from us once so far, at a price of GBP 100. We have the same fixed costs of GBP 50 and as Mrs B needed a lot more support during the initial sale we have a higher variable sales cost of GBP 30. That yields a profit of GBP 20 for each barbeque sold. Not as good as Mr A but still positive. But the story doesn’t end there. Mrs B called us two times for support with the barbeque at a cost of GBP 10 per service call and we sent out a technician to help her at a cost of GBP 20. The technician showed her how to use the barbeque but she struggled with the side-burner for keeping sauces hot. All of a sudden our GBP 10 profit has evaporated and we are left with an operating loss of minus GBP 30 once you add the cost of service. Mrs B still isn’t happy with our barbeque – our technician said he saw her surreptitiously ordering a Big Mac with extra fries from McDonalds the other day – and we are not happy either. Our accountant is just shaking his head in despair; our net net profit from Mr A and Mrs B together is now GBP 0. We have become a zombie company!

If Mr A comes back to us next year we will welcome him with open arms. Our accountant might even treat him to a glass of sherry. If Mrs B comes back next year we have a much more difficult choice to make. In fact we have a whole range of choices. Option A is to sell her another barbeque and hope that she will require less service. Assuming the variable sales costs go down to GBP 30 and she makes one service call at a cost of GBP 10 we will make a small profit of GBP 10. That would leave us a net net profit of GBP 40 from Mr A and Mrs B together. But hope is rarely a good strategy unless you are a politician.

Option B is to decline to do business with Mrs B on the grounds that the fit between her needs and our barbeque doesn’t allow us to meet our needs (for a profit). That is quite an extreme step to take. It would leave us a net net profit of GBP 30 from Mr A. But we might have excess barbeque inventory to sell off at a loss at the end of the barbeque season and Mrs B might tell everyone in the queue at McDonalds what a beastly company we are.

After this the choices get more creative and more difficult. Option C is to charge Mrs B for the cost of all the post-sale services she uses. We have the same fixed costs of GBP 50 and higher variable sales cost of GBP 30. That yields the same profit of GBP 20 for each barbeque sold. But the service story changes things significantly. Mrs B called us two times for support with the barbeque at a cost of GBP 10 per service call and we sent out a technician to help her at a cost of GBP 20. All of these were charged to her at cost. All of a sudden the company’s original minus GBP 30 of operating loss has tuned into a profit of GBP 20 once it adds on all the service charges. That would produce a net net profit of GBP 60 from Mr A and Mrs B together. But Mrs B is far from happy. She complained to the company and after we threatened to charge her an additional GBP 10 to respond to her complaint she complained to the Barbeque Ombudsman who is looking into the matter. In fact there have been so many complaints about Champion Barbeques’ misleading small print, unfair service charges and generally bullying behaviour that the Govt appointed regulator, the Barbeque Conduct Authority is starting a formal investigation. This has already cost us millions in the court of public opinion and could cost us many more millions more in the law courts.

Option D is to radically simplify the business to remove fixed and variable costs as Siegel & Etzkorn describe in their new book ‘Simple’. If the company invests GBP 20 we could probably reduce the fixed costs to GBP 40, and the variable costs of each sale to GBP 10, of each service call to GBP 5 and of each technician visit to GBP 10. In the original scenario that would leave the margin from Mr A at GBP 30 but increase the margin of Mrs B to GBP 10 for a net net profit of GBP 40 from Mr A and Mrs B together. But radical simplification has a track record of being difficult to implement and we can’t be sure of achieving all of the savings from the investment. That could leave us with all the costs and not many of the savings. A reduction of savings by 50% would reduce Mr A’s profitability to GBP 20 and Mrs B’s to minus GBP 10 for a net net profit of GBP 10 from Mr A and Mrs B together. That is better than being a zombie company, but a lot worse than from firing Mrs B or from charging her for the services used.

Option E is to dispense with the simplification and to provide our ‘Barbeque Like a Champion’ home training for every new customer at a cost to us of GBP 20 per new customer. The training would naturally include a branded recipe book, apron and barbeque utensils. In the original scenario that would leave the margin from long-time customer Mr A at GBP 30, but increase the margin of new customer Mrs B to GBP 10 (as we have solved the problem that created the original calls and technician visit) for a net net profit of GBP 40 from Mr A and Mrs B together. In the process we have changed from a company selling a product (barbeques) to become one selling a service (champion barbeque food cooked by customers).

But there’s more! Option F is to recognise that many customers aren’t really buying barbeques at all, but buying barbeque-based social occasions. Selling barbeques is a goods-dominant logic business model. Customers exchange their money for a barbeque at the point of sale and are left to get on with the barbequing themselves. It is their fault if their friends don’t like steak that only comes in two flavours: ‘well done’ and ‘carbonara’! By servitising the whole thing and offering an ‘Enjoy a Champion Barbeque, Prepared in Your Own Home by our Champion Chefs!’ experience, the company has reinvented itself and entered Pine and Gilmore’s Experience Economy. Selling tasty, freshly prepared, cooked in your own home barbeque food outcomes is a service-dominant logic business model. But this doesn’t apply to all customers. Mr A lives by himself and tends to barbeque with a few mates with a plentiful supply of beers. He is unlikely to buy the barbeque experience. The company wil never make more than the GBP 30 profit from Mr A. Mrs B is entirely different. She is an wannabe socialite and would prefer to hire the whole barbeque experience to owning a dirty, greasy, smelly barbeque! Ugh! In fact she will probably hire the experience four times each summer. Mrs B would happily pay GBP 100 for each barbeque experience, or GBP 400 over the whole season. With fixed costs of GBP 50 for the barbeque, and variable costs of GBP 50 for the more complicated experiential sale, GBP 50 for transport, GBP 100 for starters, steaks and spritzers, and GBP 100 for the Chef, Mrs B’s operating loss of minus GBP 30 for selling her a barbeque turns into an profit of GBP 50 for guaranteeing her an outcome. A win:win:win situation. The customer is happy as her social status rises, the company is happy as it rakes in the money and the technician is happy as he is now a Champion Barbeque Chef. Gordon Ramsey look out!

A lot of things go into being successful in business, but as Investment Analyst Michael Mauboussin points out in his article on ‘Death, Mean-Reversion and Taxes’, we are not entirely sure what those things are. Management books like ‘In Search of Excellence’, ‘From Good to Great’ and so on all purport to shine a light on the things that make businesses successful, unfortunately, the vast majority of them have not stood the test of time. Yesterday’s case study paragons are so often today’s junk status pariahs.

This simple example of barbeque business models show how even a simple understanding of costs, prices and value can lead to a whole host of different options: from hoping for the best, through firing unprofitable customers, charging for customer service, radical simplification, customer education, all the way to outcome servitisation. All of the options have parallels in how some industries operate today. I will leave it up to you to spot matching examples. Simply eating the costs incurred when a customer is sold an inappropriate product is not a viable long-term option. And Kant’s Categorical Imperative shows clearly that is morally and ethically wrong to expect other customers, or shareholders come to that, to have to carry those other customers’ costs. Without a thorough understanding of operating costs, market prices and what different actors in the business ecosystem value, the likelihood of choosing a workable business option, let alone a winning one, is significantly reduced.

In case you missed it, we already started the debating society. It’s a small one, but still ;)

Thx again for an insightful comment. There’s really little to dispute about this in theory, but then there is harsh business practice:

Your examples assume that a company understands what is a fixed an what is a variable costs. This is far – very far – from true, and most certainly not on an individual Customer bases. And I can’t even begin to list examples of this. The evidence is overwhelming. So what companies try to do, is attribute costs based on Activity Based Costing & Attribution models. And that is no truth either. It’s the annual “OMG here we go again” exercise in the middle of budget negotiation process. Registrations are far from complete. New system implementations (happens every day) ad costs or take them out. New processes do the same and no-one in the company takes into account Customer accounting. And so, whatever costs one can “get away with to pass-through to someone else’s profit center” in the budgeting process is considered a valid cost and allows its “owner” to do with it as planned.. eh he wanted in the first place ;)

So, of course it is important to manage both fixed an variable costs. It’s very important for a business to understand it’s cost-structure, specifically how it relates to value created, and when costs increase or can/should be decreased. I just don’t think most businesses are able to administer this in a fashion that a fair distribution of costs over Customers, fixed and variable, is indeed the case.

And all I’m saying is that in such case it’s probably not fair to bother Customers with that. Not the ones who’s variable costs are ‘being assumed’ too high, nor others to subsidize for it. And you know, as well as I do, that both situations are more likely rule then exception in business.

We are in need of different solutions. Ones that work outside of the laboratory. Solutions that anyone within a company can understand, so that “anybody knows – and can apply – everything”.

Absolutely right! There are two sides to the value proposition – what the customer is worth to you, and what you are worth to the customer. If all you focus on is what the customer’s value to you is, rather than what the customer needs from you, then your marketing effort will surely fail.

Me too.. but to what extent are costs (variable or fixed) relevant? The Customer can’t help your cost-structure.. Nor the problems that you cause that raise a Customer’s cost of doing business with you (time mostly, but money in many cases as well)..

If you can’t serve your Customers for the price you offered her, eat it, don’t blame it on her by making her feel less welcome, treating her worse etc.. And learn from it

Differentiation (e.g. rewards/discounts/early bird offerings etc) based on loyalty (retention and/or share of wallet/penetration) is what Customers expect, but often don’t get, because we are too busy trying to find Customers that are like them.. the “valuable ones”, the ones too “stupid” too leave..

Difficult choices? Not really. Just difficult to convince others to make them ;)

Any company that only focussed on the top 80 out of its 50,000 customers would be out of business in no time. And there is no guarantee that the top 80 in seat sales would also be the top 80 in ancillary sales and low-cost service, let alone word of mouse.

Most companies need a range of customers to cover their fixed costs. Usually more than just 80 customers. They need to focus on delivering good, low-cost services to as many customers as they can, providing, of course, that the revenue from the customer is greater than their share of the fixed costs plus their variable costs.

You propose in your last paragraph that “marketing investment would be more productive if you knew what your customers value, not who you value?“. By which I assume you mean, companies should focus on delivering value to the customer, rather than on the value of the customer. This has an attractive if somewhat oblique ring to it, particularly if you believe that returns are the intended but emergent consequences of doing business better. But does that assumption really hold true? Let’s have a look.

Companies would like to be able to “treat customers differently”, as Don & Martha so eloquently put it all those years ago. For most that means aspiring to manage customers for optimum value (to themselves). This is a monumental undertaking. Not only does it require lots if data about revenues, it also requires lots of data about costs, elasticities and risks. And it requires that the companies can offer different service to different customers based on their value; Platinum customers get driven by Rolls Royce to their waiting aircraft, whilst Common or Garden customers get to run, walk or crawl to it and then have to peddle once they are onboard. Most companies simply do not have the data, nor the ability to differentiate their service. So they use proxies for value ranging from sales revenues, through miles flown to, well, you name it. The result is often not very satisfying, either for the company or for customers; the wrong decisions are taken, 1000s of customers get very public ‘Dear John’ letters (Hello US mobile telco Sprint, I am looking at you!), and the CMO and CEO then get fired.

Over the past few years, many companies have started investing in Customer Experience management and its newer sibling, Service Design. The idea is that rather than just focussing on doing things TO customers during marketing, sales and service contacts, you should instead focus on doing things FOR customers during all the contacts in the end-to-end lifecycle. Service Design in particular uses empathetic methods to really understand the customer and what they do. The assumption is that if you provide customers with a better experience they will be more satisfied, buy more and tell more people about it. The often unspoken assumption is that all this costs a lot more money than offering a vanilla service to everyone. It’s early days yet and the jury is still out on whether these approaches actually work in practice. By which I mean create incremental economic value for the company. As you know yourself, newly designed customer experiences often remain unimplemented for a variety of reasons. In fact anecdotal evidence suggests 75% of them never get implemented and many of those that do, fail to pass the test of time.

More recently, a few companies have started to bring together the best of real-time analytics, dynamic capabilities and digital technologies to create much better experiences that can be adapted for different customers and different circumstances. They recognise that customers have jobs-to-be-done and that they combine their own resources with those of companies when they hire interactions to get the jobs done. It is during these interactions that value is co-created as the customer gets his jobs done and the company gets their jobs done as well. I like win:win situations. And so do companies and customers. Add all the interactions together and you have the customer journey. Not all the bits of the customer journey are equally important to customers and companies. The marketing and sales interactions leading up to the point of sale are particularly important for companies, as they usually get paid at the end of them. But that isn’t of much value to their customers as not only have they parted with their hard-earned cash, but they also haven’t created any value from using the products they bought. The real value for customers comes during the post-sales service and particularly, the usage interactions. This is when they really create value from using the resources embedded in the products to do the jobs they bought the products to do. As service-dominant logic would explain, products are just collections of resources waiting to be used to co-create value through their usage. So what has this to do with your original proposition, and how does this involve real-time analytics, dynamic capabilities and digital technologies?

I agree with you that companies could do a great deal batter if they understood who their customers are, what they want and what interactions they hire in the customer journey to get it. But as many studies have shown, companies can rarely be all things to all men and still turn an attractive profit. They have to be selective about which customers they choose to do business with, what products they offer and how they enable value co-creation through their business capabilities. That means using a proxy for customer value – often a combination of revenue, customer fit and customer affinity – to select the customers the company can serve well and profitably. Once they have selected their target customers they can do the right thing and build an experience and the supporting capabilities that optimises mutual value co-creation for itself and customers. Today, this experience is likely to use real-time data about customers and their behaviour to optimise value co-creation during interactions. It is likely to be enabled by dynamic capabilities embedded in business processes-as-a-service hosted in a private cloud by a partner such as Teradata or even outsourced to a servitised partner such as Xerox to operate on your behalf. We live in a thoroughly digital era where the mobile web means the customer increasingly has all the interactions in the customer journey at their fingertips, 24×365. Technology and data are wonderful things, but before we get carried away on the white heat of technological revolution, it is critical to realise none of this will work if the company doesn’t do its customer homework at the beginning of the process. None of this will work if the company doesn’t know who its customers are, what they want and what interactions they hire to get it. And then make some difficult choices.

There’s nothing to disagree with in your post, but I’d love you to answer the questions I raise more straight forward. Maybe rephrasing does the trick:

Q1:
Assuming resources are scarce, would you recommend a(n average) company to ditch the capability to calculate CLV and target Customers based on CLV segmentation & predictive analytics (aka the capability to manage Customers for their value at each point of interaction) in favor of building a digital analytics capability aimed to understand and respond to Customer jobs (as they emerge in context) by providing them the right resources at the right time.. (thus not the right offer at the right time)

Q2:
Making choices is very much needed, so one needs to design a service for a specific Customer segment, but does that mean a company needs to be capable of spotting potential Customers by their (behavioral) characteristics, or should a company better invest in building the right platform and customer capability to get their job done in such a manner that the right Customers will be attracted..

Q3:
Treating different Customers differently (i.e. customization by the company) or allowing customers to co-create their own experience (eg by means of mass-customization before, during and after value exchange)?

One short additional comment: I was being less general, thus more specific in my post than saying it is more important to improve the experience than to improve the value you get from a Customer.. But I guess you know that now through the questions I raised..

Well, yes. Over time that is, for many of these visitors are try-out visitors that will never come back, the others are occasional visitors, some have season tickets and the 80 are probably lifetime members that have prime seats, packages and all..

I’m not disputing the pareto distribution of Value to the Firm. To some extent this is the case, also in my experience. The problem is that almost no company succeeds in picking out the 80.. not even if they only take into account direct sales..

Really interesting article. My two cents on you bullet points:
1) right, most companies are not using lots of data (it’s just so hard to collect corporate internal data in an efficient, quick and easy manner) and social data are mostly used to support operational CRM (I mean reading and handling cases opened by the new FB comment or Twitter mention as they were originated by phone calls or chat requests) but not to find interesting variables that could be used in more complete predictive models as proxies of behaviours (i.e. I think about monthly frequency of mentions/RTs with positive sentiment by a specific customer as a recommendation propensity). Maybe when we’ll see these kind of experiments we’ll find new value in data.

2) Maybe you’re right but predictive analytics just have a solution to the “false” good buyer. Uplift modelling technique is just used to identify the most likely buyers who really react to the specific campaign incentives.

3) You’re right, maybe the real value to be used for a segmentation must be the gross contribution, not considering the cost-side. IMHO at granular level is correct especially when you want to consider the service level you want to guarantee to specific customers. But I think that for financial equilibrium it’s correct to apply the service strategies remaining inside a total cost boundary (your real and maybe unique constraint).

Finally I totally agree with the fact that companies are ow obliged to walk the new path which consider what customer really want from them more than their subjective perspectives about their needs.

Thank you, I love the way your mind works. All of your articles including this one provoke me to think much deeper on how to better run a business.. In your second last para you speak about costs, and I’m assuming you are speaking about expenses. When I rank my customers I currently do so based on the value of their gross contribution (rather than net sales) over time. Same with suppliers. Now you’re helping me think otherwise about the value of a customer.

In terms of better serving customers and so gaining some long term value it seems to me that most firms put insufficient effort into the essential follow-up in the after-sales stage of the customer journey – to first confirm the value of the initial relationship, then to learn from the customer’s experience, then to gain referrals and finally repeat business as the customer needs to get another job done. However, if, as you say, at least most of those customers are likely to buy from you again based on their first experience (regardless of the competition) then, in terms of Tipping Point personas, does not a business need to identify and retain Connectors and Salespeople as the customers most likely to generate additional value to the business? And aren’t these mainly the people who refer you to others? so tracking facebook comments as well as your own referral program is essential. And there’s another source to track.

in Bali I’m living and working in a tourist environment where it would first appear that lifetime value was unlikely, but that’s not true. We do get repeat customers over time but more importantly we get very strong word of mouth referrals. With one of my customers (Yoga Barn) this was evidenced by the number of people overseas who looked up the YB website by name rather than just “Bali Yoga”. There was no follow-up by Yoga Barn with the initial customer, so the conclusion must be that it was a privately networked referral,and valuable like gold.